Short notes on International Insurance Scene

Short notes on International Insurance Scene

The New Economic order of 1991 has brought several changes in insurance industry. The business of insurance has increased rapidly thereafter.

Premium, profitability, financial strength, prospects catastrophe losses, solvency ratio, risk management and so on are the factors of analysis of international insurance scene. They are analysed under life insurance, non-life insurance and total insurance.

Life Insurance:

The international life insurance scene has been analysed under premium, profitability, Solvency Ratio, Risk Management and prospects.

Premium:

The life insurance premium in world market has increased rapidly upto 1986 but declined thereafter.

World Life Insurance premium increased by 3.9 per cent in real terms after inflation adjustment to US $/1974 on after 2.9 per cent growth in 2004. The world premium of life insurance business has been OSD 1973703 million in 2005. India has life premium only USD 20175 million in 2005 i.e., 1.02 per cent.

India’s rank has improved from 18th to 17th in 2005. The developing countries have shown growth rate of 14.1 per cent in 2008 while developed nations has shown decline by -7.8 per cent.

The growth rate of life insurance premium in India has been 17.3 per cent in 2004 and 15.3 per cent in 2005 whereas world’s growth rate has been 9.9 per cent and 5.7 per cent respectively.

It reveals that India’s growth more satisfactory than the world average. The real growth rate after adjustment of inflation has been 10.5 per cent which is more than all the highly ranked countries.

The growth rate of life insurance premium has been constant in the world market. European life business profited from the booming stock markets which favoured the sale of unit-linked policies.

The flattering yield curve due to higher short-term interest rates made fixed annuities unattractive and the low- performing US stock markets did not support variable annuities.

In Emerging markets, life insurance is mainly driven by the fast growing incomes of a relatively. Young population which needs savings as old age protection. The life insurance premium of unit-linked and pension products.

The per capita life premium has been more than 10 ranks in United Kingdom, Switzerland, Belgium, Japan, Ireland, Finland, Denmark, France, Hong Kong and Sweden.

It reveals that almost all the developed nations have maximum life insurance cover. India stood at 78 rank having life insurance per capita merely 18.3 USD in 2005. She has enough scope of insurance development.

Percentage of Life premium to GDP:

The percentage of premium to gross Domestic product of the country was maximum of 11.17 per cent in Taiwan in 2005 followed by 10.84 per cent in South Africa.

The developed nation except United States have more than 5 per cent of their GDP in the form of life insurance premium viz. 8.90 per cent in United States, 8.63 per cent in Hong Kong, 8.36 per cent in Belgium, 8.32 per cent in Japan, 7.33 per cent in Finland, 7.27 per cent in South Korea and 7.08 per cent in France.

The percentage of life premium to GDP was merely 4.14 per cent in United States and 2.53 percent in India in 2005. It reveals that India has abundant scope of life insurance. The insurance companies should come forward to expand their business in India.

Profitability:

The outlook for 2006 has been favorable for life insurance over 2005. There has been higher demand for old provisions in a situation in which the share of retirees in the population increases and the fact that government actively shifts away from public old age provisions to private schemes.

Changing taxation of life products plays an important role both for high growth. In Germany, premium drops in life business due to removal of tax advantages on life products. It is a good lesson for India that the life insurance will decline, if Government removes the facilities of Income Taxes on the life insurance.

Profitability of life business has continued to improve in many countries as costs have been cut, guaranteed interest rates have been reduced and bonuses have been adjusted to reflect low interest rates.’

Risks products pension businesses are predicted to grow. The capital base will increased with rising retained earnings in insurance companies. Many banks have started life insurance business Unit linked business of life insurance has also increased. The economic growth has been helpful for enhancing global insurance.

Solvency:

Solvency is a challenge for life insurers as it involves different types of risk. The objective of solvency is to protect policyholders’ interest and reflect the risks to which an insurer is exposed. The solvency is decided on the bases of rules of financial resources, process of risk management and transparency.

The market consistent valuation of assets and liabilities is the basis for provision for investment risks. Solvency should in force insurer’s focus on risk/return fundamentals. It focuses on risk and capital management. European insurance industry has taken lead in solvency requirements.

European Union (EU) Solvency:

Solvency in Europe was required by the Council Directive of 1973 and 1979 which necessitated establishing capital buffer to cope with the uncertainty of insurance business. In 1994, laws were enacted to detect the insolvency case in the early stage to better protect the policyholders.

Solvency I:

The Solvency I Directives were passed in Feb. 2002. It ensured higher minimum guarantee fund increased threshold in solvency margin and composition of available capital. Solvency requirements should be fulfilled at all times and more power was given to insurance supervisory authorities. The life insurance solvency margin is calculated as:

Solvency = 4% * gross mathematical provision x retention rate mathematical provisions + 3% x capital at risk x retention rate capital at risk. Retention Rate Mathematical provisions = net provisions gross provisions Retention Rate capital at risk = net capital at risk gross capital at risk.

The minimum guarantee fund was set up = one third of the required solvency margin. The technical reserves will be invested by imposing restrictions on the asset classes. The available capital funds are calculated as the assets of the insurer free of any foreseeable liabilities less any intangible items.

Criticisms:

The valuation of assets and liabilities is not based on market consistent approach. Solvency requirements depend on mathematical reserves and capital at risk in life insurance Investment risk is not included in the required solvency margins.